Gold is not the only salvation

February 18th, 2009

A recent mineweb.com article, Is gold the only salvation from this financial Armageddon?, suggests not only that gold offers a solution to the financial crisis but notes something of which many Americans are not aware: that European banks may be in worse shape than American banks. The author further asserts that the worst is yet to come as far as European banks are concerned. Massive inflation lies ahead for Europeans.

Gold aside, the Establishment solution to the problem is to print more money, both dollars and euros. I maintain that any official use of gold in the world’s monetary system will not come until forced upon governments by the people’s rejection of paper money. When freshly printed money will not longer buy what governments want, they will be forced then to return to gold. Until then, we will have inflation.

Meanwhile, the article is an excellent read in that it further clarifies the extent of the financial crises. Still, there is an issue I take exception with.

The author declares that silver is not really a monetary metal any longer. This position is often thrown around as a reason for not buying silver during financial crises. I disagree and submit that investors who eschew silver because of this position miss an opportunity to make still greater profits during this financial meltdown. (Actually, “profits” is not the right word. Generally, gold and silver buyers are not seeking profits but hedges against inflation and currency devaluation.)

Regardless, my studies and observations of the precious metals markets convince me that silver turns in greater returns in bull markets than does gold. The writer acknowledges as much when he notes that “even though history tells us that silver’s volatility leads it to perform better than gold in percentage terms on the upside and worse on the downside. . . We are in a different situation with silver not really a monetary metal any longer. Industrial demand pressures on silver may well mitigate any price rises here.”

Both metals have been used as money for thousands of years. Now, just because there are many industrial uses for silver, this writer – and others – assert silver is no longer a monetary metal. While it is true that the IMF, which keeps track of how much gold nations hold, does not care about silver, in the end it is really people – not governments or the IMF – that determine what is to serve as money.

Yes, today we’re using government-issued paper currencies and computer entries not redeemable in gold or silver as money. But, the flaws of such currencies are becoming readily apparent. Governments around the world are inflating their money supplies in efforts to stave of recessions (depressions?) And, the people are starting to move to protect the “fruits of their labors” from inflation by buying silver as well as gold.

And rightfully so. More people have used silver as money than have used gold. Because of Roosevelt’s 1933 gold call-in, Americans have not use gold as money for 76 years. Silver coins, however, were minted until 1965. Actually, silver has nearly always been the circulating medium in hard money monetary systems because gold has too much value for day-to-day transactions.

All this brings me to this point: when the masses come to the gold-silver market, they will buy silver instead of gold because with silver they get more physical metal for the money. Buying by the masses will, in my estimation, propel the price of silver much higher – on a percentage basis – than gold, driving the gold-silver price ratio to 30, perhaps even 20.

Now, that’s a bullish outlook for silver, a longtime monetary metal that just happens to have a myriad of industrial uses. The industrial demand for silver is not a negative, as the writer of the aforementioned article says, but is, in fact, a strong positive for silver.

10 Responses to “Gold is not the only salvation”

I’ve been reading your articles for a few months now, and more and more I am impressed by your obvious knowledge of money theory and fiat currency. I am on the verge of paying off all my major debt, and now am looking actively into a diverse group of investments, no small part of which precious metals shall play. Indeed, as this ‘recession’ deepens, and more and more people fly from fiat currency to more stable commodities such as precious metals, I am less and less convinced that fiat currency fits the term of ‘money’.

Let me explain.

Money defined, is a medium of exchange. Thus fiat currency fits that role. But money is also defined as a store of value. That would lead one to believe that it retains a certain amount of value in and of itself, simply put: that the money itself is valuable. Precious metals obviously fit this term because of their many industrial uses, not to mention their simply pleasing appearance. History serves as an excellent meter in determining a commodities’ value, indeed, the cliche’ is true in that we cannot know where we are headed unless we know where we have come from.

The same is true of money. Gold has been a medium of exchange sense antiquity, as has silver, and while palladium and platinum have not enjoyed so ‘rich’ a history, theirs is nonetheless a ‘shining’ one and will play a pivotal role in the future as a store of value.

At least, that is my humble opinion on the matter.

But what I am getting at is that money is not a fictional idea. It has to be tied to reality, as precious metals are. The value of fiat currency, on the other hand, must ether be backed up by the promise of value in a real commodity (like the fractional system that America has experimented with in the past) or be mandated by government decree, which of course, is always backed up by a threat.

However, as we are seeing, as we have seen, and as we will see in the future, fiat currency cannot survive as a viable medium of exchange. It has happened time and time again on a national level, and now it is happening on a global level.

I’ve never understood why we as a race have such a hard time learning from our mistakes. Regardless, I will continue to enjoy your commentary. Keep up the good work, and as the saying goes, gold and silver must be bought.

I don’t think I have ever seen one of these “anti-silver” articles that didn’t trot out digital photography replacing chemical film as an example. But surely that ship sailed years ago? If so then any impact must be already priced in.

My greatest concern regarding the world Governments meeting of the minds is when paper in every form, (dollar,euro, yen, yuan) and so on, has been printed to levels equal to the Zimbabwe currency and “PEOPLE” the world MASSES, will no longer want/accept the lies behind currency forcing all Governments to return to real money…. (Gold, Silver), My fear is that the “20” or the worlds meeting of the minds, behind close doors, agree on (Gold, Silver) as the world’s money and with Obama’s articulate charisma coupled with his strong need to emulate the past President of the last depression “Roosevelt”, (behind closed doors) plants the already existing seed for Government confiscation of all Gold/Silver in the name of “WORLD ECONOMY”. All GOOD AMERICANS WILL TURN IN THEIR GOLD/SILVER…. OH WELL, I GUESS I WON’T BE CONSIDERED A GOOD AMERICAN. ANYTHING I HAVE I WORKED FOR AND I PAID FOR WITH PAPER DOLLARS I “EARNED” NO ONE GAVE ME NOR DID I TAKE ….. I WORKED FOR IT AND I WILL KEEP WHAT I WORKED FOR……..

The government again prohibiting Americans from owning gold bullion is something that we may have to deal with in the future, but today we have to deal with the government destroying the dollar via massive inflation of the money supply. (The Fed, of course, is part and parcel to this.) History has shown gold and silver to be the best hedges against currency debasement. Until something better comes along, I’m sticking with gold and silver.

I was “coached” to invest in circulated $20 Liberty gold coins. I paid a 14% one time fee to purchase. Now I hear that this is a bad investment.

CMISG tells me that it is a “telemarketers myth.” Swissamerica is a big outfit. They use a graph to show you what you paid retail, what they would buy back at wholesale, and what the going market value is now. So. if I could find a buyer while my coins are worth more than I paid for them, I profit. In the meantime I have to wait until Swissamerica tells me that I can sell them back my coins to them at profit. Therefore, I paid them 14% and am at their mercy (so to speak) until $20 Liberty coins increase in wholesale value. When this happens would Gold Eagles or gold bullion bars be the best investment? CMIGS says people like myself have been deceived. ANY HELP OUT THERE?

Jollanza asks if Gold Eagles or gold bullion bars would be the better investment. Presently, 1-oz gold bars sell about $25 each (per ounce) cheaper than 1-oz Gold Eagles. However, 10-oz gold bars are about $32/oz cheaper than GEs, and 100-gram gold bars are about $35/oz cheaper than GEs. So, which to buy? It comes down to personal preferences.

GEs are more compact and easier to store than 1-oz gold bars. You can put probably 100 GEs in the space that would hold 25 1-oz gold bars. Additionally, GEs are more widely recognized than 1-oz gold bars. This would be important only if you were dealing with an individual when you liquidate and not with a gold bullion dealer.

Still, there are times when all gold liquidates at the same price, so why pay the extra premium for GEs? For the reasons mentioned: easier to handle and store, and more widely recognized by the public.

A final thought: investors who want to buy at low premiums should consider the 100-oz gram gold bars. Their packaging permits them to be stored in a much smaller space than 1-oz gold bars, and 100-gram gold bars sell about $10/oz cheaper than 1-oz gold bars.

Dear Bill Haynes,
I bought some gold & silver from your firm, but mostly silver, for use as money, if and when the predicted collapse of our current financial system arrives. What is your recommendation for a silver purchase for that particular use? I would imagine 1 oz coins. If so, any one in particular? If not, what?
Thanks,
Jack

The absolute best for the collapse of the currency scenario would be pre-1965 US 90% silver coins, commonly called junk silver coins because they have no numismatic or collector value. Junk silver coins trade for the value of their silver content plus a small premium. They were originally minted to be used as money; they were used as money; they could be used as money again.

In a worst-case scenario, people would quickly learn that a pre-1965 dimes contained .0715 ounce of silver, a quarter .18 ounce and a half-dollar .36 ounce, or very close to. My preference is a bag of dimes. How many bags you buy depends on your financial circumstances and how bad you think things could get.

It’s frustrating how ill informed so many people are. I was in an economic debate with a coworker who didn’t know there was anything but Keynes. He couldn’t get passed his worship of Roosevelt. How do we educate those who think they know but are in such ignorance?

Getting someone with a closed mind to even consider new ideas has always been difficult. In your case, maybe you would want not to try to convince him of anything, but simple ask, “Have you read??) and name a book. I have no way of know which book to recommend because I don’t know the topic at issue. However, our list of Essential Reading books has a number of Primers that may be appropriate.

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